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ECON501HW6 - Economics 501.01 Microeconomic Theory...

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Economics 501.01 Microeconomic Theory Professor Patricia Reagan Autumn 2007 DUE THURSDAY NOVEMBER 29 Homework #6 1. Many consumers view a well-known brand name as a signal of quality and will pay more for a brand-name product (e.g., Bayer aspirin instead of generic aspirin, or Birds Eye frozen vegetables instead of the supermarket’s own brand). Can a brand name provide a useful signal of quality? Why or why not? 2. Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (e.g., a seven-year warranty on all parts and labor associated with mechanical problems). a. In light of your knowledge of the lemons problem, why is this a reasonable policy? b. Is the policy likely to create a moral hazard problem? Explain. 3. To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition?
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